In the banking industry, it is desirable to maintain a certain percentage of core deposits. Core deposits are deposits that do not change significantly in amount with fluctuations in the interest rate paid on the deposits. Savings account deposits are one example of a bank's core deposits. In the United States, the percentage of core deposits affects the bank's ability to maintain a favorable regulatory rating.
In addition to core deposits, banks often rely on non-core funding sources, such as brokered CDs. Brokered CDs are offered by a bank to retail customers through a deposit broker. Brokered CDs are less stable as a source of funds for banks than core deposits because depositors in brokered CDs are typically sensitive to interest rate fluctuations.
Another problem with using brokered CDs to obtain cash is that in the United States, if a bank maintains too high of a percentage of brokered deposits, the bank may be sanctioned by a regulatory agency, such as the Federal Reserve for federally chartered banks or a state banking agency for state chartered banks. Yet another problem associated with using brokered deposits is that banks are required to pay a broker's commission for brokered deposits. Thus, in the banking industry, there exist a need for a new way for banks to obtain stable funds.
Pooled depositor groups, such as trust departments, pension funds, government entities, insurance companies, and any entities that are allowed to make deposits into a negotiated order of withdrawal (NOW) account, are constantly looking for safe, insured deposit vehicles for their funds. In addition, it is desirable for individual depositors in a pooled depositor group to be able to access funds without penalty on a short-term basis. Conventionally, pooled depositor groups have invested in money market funds. However, investing in money market funds is undesirable because money market funds have historically paid low interest rates. Certificates of deposit are undesirable because money is not accessible on a short-term basis without paying a penalty. In addition, under current FDIC regulations, an individual's deposits at a single institution in excess of $100,000 are not federally insured. As a result, in order to fully insure a depositor's investment, a trust department is required to divide a depositor's assets in excess of $100,000 among multiple banks. Accordingly, in light of these difficulties associated with conventional investment vehicles, there exists a need for an insured or collateralized deposit vehicle for pooled depositor groups.